22 January 2009

How the new solvency regulation will change the insurance industry – A brief overview

Solvency II has been designed to replace the simply structured European solvency regulations by a modern, consistently risk-oriented system of financial supervision. This means moving away from a rule-based and towards a principle-based approach to regulation in which insurers’ risks are evaluated according to risk-adequate and market-consistent – i.e. economic – criteria. Therefore, risks are assessed more precisely and promptly. The discussion has taken years, the first proposal for the Framework Directive having been tabled by the European Commission more than 18 months ago. It has been clear for some time: Solvency II is good for consumers, the supervisory authorities and Europe. And it is the key to the future for the insurance industry. But despite all the progress made, agreement on Solvency II has not yet been reached by the 27 EU states and the European Parliament. The time is ripe, and there is a sense of urgency.

Some insurers will need to gear up their risk assessment and risk management practices and manage their risks more actively, e.g. by increasing their risk transfer, in order to optimise their solvency position in accordance with Solvency II. There is little doubt that risks from investments will come under closer scrutiny, often eliminating any future reliance on investment income to subsidise underwriting results. In the light of Solvency II, reinsurance will have an even more vital role to play. By providing superior Solvency II services – from analyses of risk capital requirements to customised risk transfer solutions – we can do more to help our clients succeed.